Co-blogger Scott Sumner argues for, without quite endorsing, Senator Mitt Romney’s proposal for a large child allowance. I won’t lay out the specifics of Romney’s proposal in detail because Scott has already done it and the Tax Foundation has provided even more details.
I will point out that the budget cost of the plan, all else equal, is estimated to be about $229.5 billion annually. While that might not sound like a lot in this time of trillion-dollar spending programs, it is a lot.
Of course, not all else is equal. If Romney got his way, the child care tax credit would be eliminated, which would save $117 billion annually, leaving $112.5 billion as the net cost. He would also reform the Earned Income Tax Credit, saving $46.5 billion annually, driving the net expenditure for his plan down to $66 billion.
He would come up with the $66 billion by increasing taxes in three ways and cutting two other spending programs.
While the Tax Foundation did an excellent job of analyzing the provisions of the Romney plan, it did make one error. The analysts, Erica York and Garrett Watson, state:
Romney estimates eliminating the SALT deduction would result in $25.2 billion in annual savings through 2025.
But eliminating the SALT deduction doesn’t save money: it costs money. It costs taxpayers who will lose the deduction. Of course, York and Watson may be quoting Romney and so it may be Romney’s mistake. But it is a mistake.
Note also that the child allowance starts phasing out for single taxpayers with income about $200,000 and for married, filing jointly taxpayers with income above $400,000, at a rate of $50 per $1,000 in income. That implies that very high-income people, virtually all of whom are already in a fairly high federal tax bracket, will see their marginal tax rates increase by 5 percentage points. That’s if they have 1 child. And if they have 2 children, their marginal tax rates will be 5 percentage points higher over an even larger range of income than the Tax Foundation’s graph shows.
Most of these high-income people will be in a 35 percent tax bracket. This phase-out increases their marginal tax rate by 14.3 percent (5 is 14.3 percent of 35). The efficiency loss, also called deadweight loss (DWL), from taxes is proportional to the square of the tax rate. So the 14.3 percent increase in the marginal tax rate doesn’t increase DWL by 14.3 percent. It increases it by 30.6 percent. (Take 0.4 squared divided by 0.35 squared and you get 1.306.) That’s a large increase.
And why all this? Why does it make sense to subsidize people having children?
Two other points.
First, although Scott Sumner says that the proposal will increase equity, he doesn’t define equity. But implicit in his discussion is the idea that equity is synonymous with income equality or, at least, reduced income inequality. That’s not my view. My view is that people are treated equitably when other people don’t take their stuff. Romney would tax people more when they live in high-tax states and thus lose their deduction of state and local taxes. That’s not fair. (I think, along with Scott, that the SALT deduction should be zero, but in return, marginal tax rates for high-income people should be cut.)
Second, what happened to Romney’s fear, which he once had, of the deficit. The budget deficit is huge this year and, although it will likely be lower next year, it is set to be at least $1 trillion annually for a long, long time. We should be looking at paring down “entitlements” such as Social Security, Medicare, and Medicaid, not adding new ones.
READER COMMENTS
Dennis H
Feb 8 2021 at 8:40pm
Good points as usual, Dave! I would simply add that, just like the discussions surrounding the 3rd stimulus checks, the arbitrariness (if there is such a word) of the eligibility thresholds for receiving these benefits seem as arcane as the proposal itself. Thus, ideas like these that might otherwise generate bipartisan support end up being ideas that further hurt our country economically and otherwise.
Scott Sumner
Feb 8 2021 at 9:28pm
David, You said:
“But implicit in his discussion is the idea that equity is synonymous with income equality or, at least, reduced income inequality. That’s not my view. My view is that people are treated equitably when other people don’t take their stuff.”
That’s fine as a definition, but in that case I’d just use a different term. Even if I accepted your definition of “equity”, it would not change my views on Romney’s proposal at all. I’d just replace “equity” with “income equality” in my post, and otherwise keep the argument the same.
I think my use of equity is consistent with how it’s used in economics textbooks when they discuss the equity/efficiency trade-off.
Kevin
Feb 8 2021 at 10:40pm
Relieving distress is one thing, but why does Romney want to subsidize child rearing for families that make in excess of $400,000 a year? Why should we be giving handouts to families making even $80,000 a year? Why is it becoming accepted that income inequality is a sufficient reason for redistribution? Isn’t income inequality the natural, logical, expected outcome of people who bring diverse skills and ultimately value to the productivity table?
Why reward people simply for having children? Shouldn’t the only goal of anti-poverty programs be to target those that are truly in need? How well does Romney’s child allowance accomplish this? If we feel that government is the best way to handle poverty, why not eliminate the bureaucracy and just institute a negative income tax?
Thomas Hutcheson
Feb 9 2021 at 6:57am
I do not understand the (binary) distinction you seem to draw between relieving poverty and and redistribution.
The idea of redistribution is pretty standard; a dollar of consumption by a high-consumption individual is of lower utility than that of the lower-consumption person. If part of utility come from relative consumption, then the argument is even stronger.
Of course taxing consumption can lead to less income generating behavior, so there are limits.
Of course transferring consumption from non-reproducers to reproducers is largely arbitrary although there are some arguments from agglomeration economies
RPLong
Feb 9 2021 at 2:56pm
Kevin, you write:
One of the reasons Romney wants to do this is because he is a mormon, and mormons believe that they have been commanded to “multiply and replenish the Earth.” The charitable view is that this kind of policy is in Romney’s self-interest and that of his family. The more cynical view is that it’s pure pork for his Utah constituency.
mike
Feb 9 2021 at 1:22am
Romney estimates eliminating the SALT deduction would result in $25.2 billion in annual savings through 2025.
To help with this part… right now the SALT is capped at 10k, I believe he advocates removing it all the way (ie it would be 0 not 10k). SALT before lead to 60B a year in spending i think i saw somewhere..apparently now its around 25B? presumably that’s what romney would use as a partial pay for.
Pretty sure that’s the rough math, and hopefully helpful!
And overall, the DWL 30.6% calculation is helpful and new way for me at least to look at your broader point
David Henderson
Feb 9 2021 at 5:47pm
Thanks, mike. I think you missed my point.
I wasn’t challenging the numbers: I’m saying that taxing people more is not a “saving.”
Jeff
Feb 10 2021 at 9:11am
If you’re going to talk about “savings” from the POV of the government as a uniform bad, why not apply the same logic to the child tax credit elimination and EITC changes “savings” discussed in the above paragraphs? “Costs” imposed on taxpayers are still costs if we apply your point across the board! So the authors either made no errors or the entire accounting exercise in the post is an error.
Worth considering the distributional effects of eliminating the SALT deduction. It’s beneficiaries are overwhelmingly those not the most in need of transfers. Even if they live in high-tax states, why should that lifestyle be subsidized? This deduction didn’t always exist, why are we treating its existence as the natural state of affairs? Maybe you think increasing anyone’s tax bill on general principle is bad, but we should be clear about who the beneficiaries of a program being eliminated are and weight that accordingly.
David Henderson
Feb 10 2021 at 1:34pm
Jeff,
You write:
That’s a good point. So really what I should have noted with the changes to the child tax credit and the EITC is that the part that is “refundable,” a euphemism that means that people get it even if it is a grant from government and not just a cut in their taxes, is the saving.
You write:
I agree with your reasoning. Or, more accurately, you agree with me. You might have missed the part of my post where I said:
Jens
Feb 9 2021 at 5:00am
If this expresses a strong, primary, unchallenged conviction, then there is a great danger that it will lead – in all possible argumentative detours – to a very fundamental and constructed distinction between action and omission, which is incompatible with a clear reflection on consequences.
nobody.really
Feb 10 2021 at 9:25am
A fire sweeps through a city block. The fire department arrives and puts out the fires in all the houses occupied by white people–and leaves the people of color to die.
The fire department didn’t take anybody’s stuff. Did they act equitably?
People have different understandings of government’s role, and thus draw many different conclusions about what government should do. But honestly, I can’t recall ever meeting someone who would describe this situation as equitable–until now.
Thomas Hutcheson
Feb 9 2021 at 6:37am
I agree about the deficit. We need to increase taxes to bring the structural deficit down to at least the federal investment (expenditure with NPV>0)
I continue to search for behavioral distortion caused by payment of SALT, (unless it is conceived of as an incentive for living in states with higher taxation). Unlike other forms of tax preferences for favored forms of consumption which should be effected if at all with partial tax credits, SALT seems like something the taxpayer does not exercise control over and so should be taxed as non-income, a deduction.
Vivian Darkbloom
Feb 9 2021 at 9:41am
“But eliminating the SALT deduction doesn’t save money: it costs money. It costs taxpayers who will lose the deduction. Of course, York and Watson may be quoting Romney and so it may be Romney’s mistake. But it is a mistake.”
I wouldn’t call this a “mistake” if one understands that the perspective (obvious, I think, from the context) is that SALT deductions “costs” the federal government as measured by a defined baseline rather than the perspective of individual taxpayers. The starting point here is the idea of “tax expenditures” which has been a standard term and concept in tax policy discussions since 1967 (as introduced by Stanley Surrey). As explained by the Joint Committee on Taxation:
“Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the “Budget Act”) as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.”
The Romney estimate on the “savings” due to the elimination of this tax expenditure tracks fairly close the current JCT estimate.
https://www.jct.gov/publications/2020/jcx-23-20/
JCX-23-20 (November 05, 2020)
See nearly last entry under “General Government”
robc
Feb 10 2021 at 6:46am
The term “tax expenditures” probably belongs better over in the Orwell discussions.
nobody.really
Feb 10 2021 at 8:50am
I cannot claim any great expertise in public finance, but I have often read the terms “tax savings” and “tax expenditures” in discussions about how a change in tax policy would affect government revenues.
These strike me as quite useful and intuitive concepts. Indeed, I don’t know how we could discuss public finance policies without them–or at least, without some substitute for them. Note, for example, that immediately after Henderson complains about Sumner’s uses of “savings,” Henderson raises concerns for how Romney’s proposal would affect the deficit. I regard this as a perfectly valid concern, often raised in public finance discussions–and often expressed by saying, “This change in tax policy would result in a tax expenditure/savings of $_____.”
So this seems like a semantic issue. Perhaps Henderson has simply not become acquainted with public finance terms.
Vivian Darkbloom
Feb 10 2021 at 9:06am
Expert or not, I think you have it exactly right. The discussion is with respect to the effect on the federal budget, not on the wallets of individual taxpayers.
JayT
Feb 9 2021 at 5:24pm
Are the people in high tax states currently taking away from the people in low tax states? It seems to me that while not perfect, this is more equitable since everyone is eligible for the same thing. Obviously getting rid of SALT and not replacing it with anything would be the most equitable, but this is at least a step in the right direction.
Philo
Feb 9 2021 at 11:38pm
As a utilitarian, I think that one’s attitude towards any given policy proposal should be determined by an expected-value calculation. One should compare how good the situation is expected to be if the proposal were adopted with how good if it were not adopted, and favor the proposal just in case the former is greater than the latter. Your discussion is illuminating, but it leaves me short of forming my attitude towards Romney’s proposal, for I do not know what are the probabilities and values of the likely alternatives.
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